UK inflation remained steady at 2.2% in August, maintaining the same rate seen in July. This consistent figure raises the possibility of further interest rate cuts by the Bank of England later this year, as policymakers assess the current economic landscape. The unchanged inflation rate aligns with economists’ expectations, based on a Reuters poll, indicating that price growth is stabilising after months of fluctuations.
The data, released by the Office for National Statistics, highlights the balance the Bank of England must strike in managing inflation while supporting economic growth. With inflation holding at this level, it leaves the door open for the Bank’s Monetary Policy Committee (MPC) to consider additional cuts to interest rates in an effort to stimulate spending and ease financial pressures on households and businesses.
This news comes ahead of the MPC’s next decision, expected on Thursday. In August, the Bank had already cut interest rates by a quarter of a percentage point, reducing the base rate to 5%. This move aimed to mitigate rising living costs and stabilise the economy. The steady inflation rate adds further weight to the argument that another rate reduction could be warranted to foster economic recovery.
The upcoming rate decision will be closely watched, as it could signal the Bank’s ongoing approach to managing the balance between inflation control and economic growth. Should inflation remain under control, the Bank may opt for more aggressive rate cuts to ensure a softer landing for the UK economy amidst global economic uncertainty.
Economists have noted that ongoing price pressures in the services sector, highlighted in the latest inflation data, suggest the Bank of England’s Monetary Policy Committee (MPC) is likely to leave interest rates unchanged this week.
Despite this, the Bank is expected to make further rate cuts later this year. Governor Andrew Bailey has indicated increased confidence that the surge in prices is coming under control, especially as economic momentum appears to be slowing.
Ruth Gregory from Capital Economics commented, “A pause on interest rate cuts was already anticipated, and today’s inflation report strengthens that expectation. We still believe the next quarter-point rate cut will occur in November.”
Following the release of inflation figures, traders reduced expectations of the Monetary Policy Committee cutting rates on Thursday, with the likelihood dropping to 25% from the earlier 35%. Sterling responded positively, rising 0.5% against the dollar to $1.3222.
In August, headline inflation remained near the Bank of England’s 2% target, having reached that mark in May for the first time in three years after peaking at over 11% in 2022.
Darren Jones, the UK Treasury’s chief secretary, acknowledged the challenges, stating, “Years of high inflation have had a significant impact, and prices remain much higher than they were four years ago. While lower inflation is positive, we understand many families are still facing financial difficulties.”
Services inflation, a key indicator of domestic price pressures for the Bank of England, increased to 5.6% in August, slightly higher than the 5.5% expected by economists and up from 5.2% in July. This was revealed in the latest figures.
The rise in services inflation was mainly driven by a notable 22% increase in airfares between July and August, the second-largest on record according to the Office for National Statistics (ONS).
However, the overall inflation rate was softened by lower fuel prices and reduced charges from restaurants and hotels, which helped offset the jump in airfares.
Meanwhile, core inflation, which excludes volatile food and energy prices, stood at 3.6% in August, up from 3.3% in the previous month.
James Smith from ING noted that the Bank of England is unlikely to be overly worried about the recent surge in airfares, given the volatility of that category. He added that there are “good reasons” to believe inflationary pressures will ease as the year progresses.
Smith expects the Bank of England to shift towards quicker rate cuts during the winter months, reflecting a broader consensus among policymakers.
These comments come after recent data showed a slowdown in wage growth, another key metric for the BoE. In the three months to July, annual earnings growth, excluding bonuses, fell to 5.1%, down from 5.4% in the period ending in May, according to the Office for National Statistics.
At the same time, the UK economy has shown signs of losing momentum, with output stagnating in both June and July.
The Bank of England’s decision this week coincides with expectations that the US Federal Reserve will reduce rates by a quarter point. In the US, inflation worries are easing, but concerns are shifting towards job creation and the overall strength of the labour market.
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